Right way to review your investment portfolio: Do not just look at returns, consider these key metrics instead A stock may have risen well, but that is a poor reason to sell if it is on a growth momentum and the business is doing well. Many sell rules that dont consider the current market performance can lead to early exits and suboptimal returns
Uma Shashikant
Chairperson, Centre for Investment Education and Learning
"I am not sure what price I paid for them,” lamented my friend. He was talking about the 200 or so shares of a blue-chip company that he had bought almost 25 years ago. During this long period of holding, there had been splits and bonus issues, rights that he had subscribed to, and now a merger and conversion to another stock. “What is the current value of your holding?” I asked. “That is easy; it is in the demat account,” he said. “That is all that matters,” I told him.
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} We obsess a lot about how our investment portfolio has performed. However, this might be less important than what we are doing with it knowing its current market value. It might make us feel very proud and accomplished to know that the asset we bought for a pittance is worth so much more today. Some of us also specialise in the art of selectively picking the assets that performed the best and making it our favourite story to tell everyone. We believe this stellar performance to be representative of how our money is doing. Why is this focus on where we started and where we are with respect to our investments not really helpful?
First, what we manage for the purpose of return and risk is the current value and composition of our portfolio. This focus is what matters. We could have 20 things in the portfolio, all in different proportions, and adding up to a certain value. How this number grows depends on what we hold currently and in what quantum. To tweak this, we need the past and current performances of the stock, fund, or asset, in its absolute sense. This data is what helps in our decision to hold, add, reduce, or sell. Not the data at the time that we came in and with how much.
Second, if we focus too much on our gains from a holding, we may make decisions that are not aligned with the market trends. A stock may have gone from Rs.20 to Rs.200, but that is a poor reason to sell if it is on a growth momentum and the business is doing very well. Many portfolios are hurt by the adage, ‘book profits, don’t be greedy’. Mechanical sell rules that don’t consider the current market performance of an investment can lead to early exits and suboptimal returns.
Third, while evaluating an investment, we may not be accounting for the time value of money or the investment’s compound annual growth rate. We may simply be making an absolute number comparison: “I bought this asset for Rs.200 and am selling it for Rs.2,000. I have made my money.” This simplification might ignore the years it took for that appreciation to happen. A friend sold a 15-year-old ancestral property with this math in mind, and it came up for redevelopment soon after. If the decision had been based on the current market information for that asset, she would have been much better off.
Fourth, we may not always be able to make realistic assumptions about how much growth took place due to our contribution and how much was due to the growth in value over time. This is true with respect to longterm saving for life goals. We may save for the child’s higher education using a mutual fund SIP. Our retirement corpus may be built with the help of a monthly contribution over many years. In these cases, the current value of the corpus is what matters. Keeping the focus on how much we may need, and allowing both our contribution and market appreciation to enable it, is the sensible approach to defining and funding a goal. The decisions to make are: Can we do more? Is the portfolio we invested in performing well? The fund manager’s performance and return numbers matter more than how our own numbers added up.
Fifth, action points must arise from the current allocation, not history. A friend divided his investment into two demat accounts, each opened jointly with one of his two children. The value of the portfolios was equal when this was done since the intent was to divide the asset fairly between the two children. Ten years later, when he passed away, the values of both the portfolios were vastly different. A few multibaggers in one portfolio and some laggards in the other had tilted the balance. A better choice would have been to have one account, with both the children as nominees having an equal share. On their father’s passing away, they would have received an equal amount based on the existing market value.
Sixth, portfolio components change with time. Handling this is critical to the overall wealth that is being managed. When we say that asset allocation is the key driver of a household’s wealth, we want focus on this factor. One could have earned the highest return from a multibagger stock and it could have filled one with pride. However, if that investment comprised just 2% of the portfolio, what difference would it make? The equity portfolio of an investor was doing very well, but his mutual fund SIP was Rs.5,000 a month and the home loan EMI for the house was Rs.35,000 a month. The household’s dominant asset would be the house they are living in. This is the component that needs work, and as the income increases, enhancing the SIP contribution is what will bring about balance over time.
Portfolio review is a task we all carry out routinely. Do not obsess too deeply about how much each asset of yours has grown in value, or be enamoured with how well you selected the asset and timed it. Focus, instead, on the proportions that you hold in each asset. Then check how each asset has performed based on published historical numbers and the outlook based on current trends. If your review and revision manage to remove personal triumphs and failures from the equation, your wealth is likely to be better off.
The Author IS CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING
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This story originally appeared on: India Times - Author:Faqs of Insurances
